Economic Survey of Ireland 2009: Rebuilding the public finances

The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Ireland published on 4 November 2009.

Contents

Substantial fiscal consolidation is needed

The large deficit requires a major fiscal consolidation over a sustained period and this has already begun. Revenues have shrunk rapidly as property-related receipts have collapsed, while real expenditures have been on a strong upward path for several years and there is further pressure from rising social spending related to unemployment. Debt service costs have also risen. Restoring the budget to a sustainable path will require both increases in revenues and cuts in public expenditure. The introduction of an Income Levy has raised additional revenue. There is scope to widen the tax base. Consolidation through spending cuts will also be required. The Report of the Special Group on Public Service Numbers and Expenditure Programmes is of importance in this regard. Weaknesses in the fiscal framework are partly responsible for the current situation and reforms would add to the credibility of the consolidation. Multi annual plans for current spending should be made permanent and overall expenditure ceilings introduced. Consideration should be given to the creation of an independent body to advise on fiscal sustainability issues. Stronger budgetary institutions could help make policy more counter cyclical. Consideration should be given to the publication of a complete balance sheet for the public sector in line with practice in some other countries.

The tax base should be broadened

Tax revenues became too dependent on construction and housing transaction-related receipts as the market boomed, while the revenue-raising capacity of the income tax system was weakened by rate cuts and a narrowing of the tax base. There is an extensive and inefficient system of tax reliefs, thus allowing many people to pay little or no income tax at all, although they are taxed in other ways. A comprehensive review of tax expenditures has recently been undertaken by the Commission on Taxation. Many should be eliminated or deductibility limited to the standard rate and capped. While direct tax rates have been increased now through various levies, these should be integrated with income taxes when the tax base has been repaired. Personal allowances should be reduced with the objective of widening the tax base. There is little scope to raise indirect taxes in general.

Spending should be contained and value for money improved

Public spending increased rapidly while revenues were growing and there is now strong upward pressure from unemployment related social spending. Substantial cuts in spending are warranted as part of the fiscal consolidation. Investment spending should be reduced in line with current plans but maintained at a reasonable pace to continue upgrading the infrastructure. Public-private partnership funding should be used only where this increases efficiency. The largest items of public spending are wages and social welfare. Public sector wages should be reviewed independently in the light of the developments in the private sector and falling price levels, and wages and government employment should be reduced. Public sector pensions should be overhauled in the light of private-sector arrangements. Benefits where entitlement does not depend on household resources retain an important role in social welfare policy. This approach should be reconsidered. Benefits should in general be subject to income tax. The level of benefits should be reviewed in light of falling wages. The public sector has over expanded and there is scope to increase efficiency. Health spending can be reduced by cutting costs and redeploying manpower more effectively. The Medical Card scheme should be reviewed to ensure that it is meeting its objectives in the most efficient way. There is also scope for better value for money in education spending. Secondary level class sizes could be raised without necessarily reducing the quality of education. Third level tuition fees should be introduced, supported by a system of loans, to raise funding, improve incentives and make the system fairer. Further modernisation of the public service and measures to improve efficiency, including implementation of recommendations made by the OECD in the Towards an Integrated Public Service report, would help to maintain and improve services even as overall spending is reduced. These include measures to increase mobility, managerial flexibility, the effectiveness of staff performance management and the use of E-government. Public sector management should be further strengthened and mechanisms such as Output Statements should have a greater impact on the allocation of scarce resources. Outsourcing should be increased where it is proven to be more efficient. Greater flexibility and managerial accountability is required within the public service. The number and effectiveness of agencies should continue to be reviewed and departments should improve their oversight of agencies.

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